The key for markets next week will be inflation as stocks try to maintain record highs

Investors will get another look at the inflation picture next week at a time when some stronger economic data has Wall Street concerned the Federal Reserve won’t cut rates this summer. The news will come with stocks on pace to close out a strong month that included all-time highs. Stocks are about to close out an impressive month of gains after some softer inflation data released earlier in May, as well as a stronger-than-expected corporate earnings season, revived investor exuberance in the market rally. The Dow Jones Industrial Average topped 40,000 for the first time ever this month. But more recently, the outlook has been mixed after some stronger economic data, and some cracks in the consumer, muddied the interest rate outlook. On Friday, the 30-stock Dow was on pace to snap a five-week win streak, falling by 2% for the period. On the other hand, the S & P 500 and Nasdaq Composite were each set to register a fifth straight consecutive week of gains, up by 0.1% and 1.4%, respectively, following Nvidia’s most recent results. The April personal consumption expenditures report that’s due out next Friday has the potential to add to the recent optimism, or further complicate what the Fed can be expected to do. Market expectations of a rate cut have moved down to just one in 2024, coming in November, according to the CME FedWatch Tool . .DJI 5D mountain Dow Jones Industrial Average “It has the potential to add to the fire as it relates to not cutting this year,” said Mike Dickson, head of research and quantitative strategist at Horizon Investments. But Dickson noted that further data is needed before the Fed makes any decision. “If this month is good, and next month is good, then you know, whatever the print we get in August would be far more important, because that might impact whether [interest rate cuts] come before the election or not,” Dickson said. “And we’re not going to come to that conclusion, regardless of what the number is this month.” Confounding inflation, consumer The April personal income and expenditures report, which includes the PCE inflation reading, could confirm the recent trend of cooling inflation. Economists polled by FactSet anticipate the consumer spending measure to have risen by 0.3% last month, down sharply from the 0.8% increase the prior month. Core PCE is anticipated to have fallen to 0.26% and 2.8% on a monthly and yearly basis, according to FactSet. That’s compared to the 0.32% increase on the month, and a 2.8% yearly gain. “Inflation is likely to be much improved by September but hardly perfect and still at a year-on-year rate that makes cutting a less than obvious decision,” Goldman Sachs economist David Mericle wrote. But others worry that some signs of consumer weakness, at a time of high equity valuations, has the potential to hit equities over the summer. A recent spate of earnings reports show a diverging picture of consumer behavior. Target, for example, said it’s lowering prices because of less demand from shoppers. Steph Guild, investment strategist at Robinhood Financial, said she anticipates an 8% to 10% correction over the next few months, citing growing signs of weakness in the consumer that could slow growth. “I think inflation is coming down, and while it’s been slower to come down, I think the bigger reason it may come down is because of slowing growth from a slowing consumer,” Guild said. Still, she remains positive that equities will end the year higher from where they are here, saying any drawdown is unlikely to be very deep. Similarly, other market observers worry that the investors are overly bullish heading into the summer months. Goldman Sachs’ Christian Mueller-Glissmann on Thursday wrote that the firm’s risk appetite indicator is nearing its highs of 2021, as well as toward its highest levels since 1991, a level that could “present a speed limit for risky assets into the summer.” “Bullish risk appetite or sentiment on its own is not a bearish signal, especially as long as macro conditions remain supportive,” Christian Mueller-Glissmann said. “However, it increases vulnerability to growth and rate shocks – we remain [overweight] equities, and to protect equity longs we look at selective hedges for the rest of the year.” Elsewhere, however, Horizon Investments’ Dickson anticipates that the outlook for equities is favorable regardless of how the PCE number comes in, saying that stronger earnings, as well as the probable cap on interest rate hikes, can continue to power stocks. Dickson said he favors large cap tech stocks, but urged caution around small caps that he feels will be better positioned to rally when investors have a better idea on when the Fed will cut rates. “We’re set up pretty good to kind of grind higher here, given the dynamics that we have right now,” Dickson said. Next week will bring further retail earnings results from Costco Wholesale, Ulta Beauty and Dollar General that could continue to give clarity on the consumer. Software names HP and Salesforce are also on deck. Week ahead calendar All times ET. Monday May 27 No notable events Tuesday May 28 9 a.m. FHFA Home Price Index (March) 9 a.m. S & P/Case-Shiller comp.20 HPI (March) 10 a.m. Consumer Confidence (May) 10:30 a.m. Dallas Fed Index (May) Wednesday May 29 10 a.m. Richmond Fed Index (May) 2 p.m. Fed Beige Book Earnings: HP , Salesforce , Agilent Technologies Thursday May 30 8:30 a.m. Continuing Jobless Claims (05/18) 8:30 a.m. GDP (Q1) 8:30 a.m. Initial Claims (05/25) 8:30 a.m. Wholesale Inventories (April) 10 a.m. Pending Home Sales (April) Earnings: Costco Wholesale , Ulta Beauty , NetApp , Best Buy , Dollar General , Hormel Foods Friday May 31 8:30 a.m. Personal Consumption Expenditure (April) 8:30 a.m. Personal Income (April) 9:45 a.m. Chicago PMI (May)